Acceptance of Decisions’ Consequences

If you are wondering about Ana’s comment…. I shall have a hip replacement on June 11 and in all likelihood, shall be bed ridden until June 26. In that time, some of my students and friends will make contributions to keep the blog going while I am away. Trust readers will be generous and accept their offerings until I return.

Now to today’s thoughts.

I am sometimes asked: ‘If you could only nomimate one factor, what is the single most important factor for your success?”

That’s a tough question because there are so many elements that led to it and continue to sustain it. But if I were forced to give an answer, I say ‘trust’ that I will make the best decision possible in the circumstances. Mark Douglas (The Disciplined Trader) identified 4 fears that are barriers to our trading success:

  • The Fear of Losing Money
  • The Fear of Being Wrong
  • The Fear of Missing Out
  • The Fear of Leaving Money on the Table.

I’d add a fifth: The Fear of Succeeding.

Mark’s four fears often block us from accepting the results of our decisions. For example: I had decided to begin taking profits at the $128 level basis the nearest futures month in Crude Oil. This was due to:

  1. Ratio Targets at $130 to $131
  2. Statistically the 13-period impulse swing on a weekly chart (13-w) was way over-extended
  3. The media hype was for crude to go much higher; the figures, $150 and $200, have been bandied around

By the time Crude hit $134, I was out of 90% of the Open Positions I had so painstakngly built up these past months. I shall not re-enter until the market has at least a 13-w correction. It may be that Crude will hit more than $200.00 before correcting; but irrespective of what Crude does, I’ll stay on the sidelines until the 13-w correction occurs.

I accepted that I could experience all four fears BEFORE I planned and executed the plan to exit my mega Crude positions; and, I accepted that the market could run on without me. On the other hand, I also saw that that it could also come off quite strongly from the 130-odd level.

The same could be said for the ES positions I had taken on May 16. Over the weekend, I decided to exit the longs mainly because the rally since May 9 had been on declining average volume. So Central Time’s Sunday night session, I exited at 1425 to 1427. When the market rallied intra-day on May 19, I stayed out.

How do I feel about leaving so much money on the table?

I’d be lying if I said I did not experience some twinges of flashing regret. But I accept the results as part of the cost of doing business. I also know that the strategies have, so far at least, brought some fabulous returns. And, I accept that given my current market knowledge, there is no way I would have anticipated the ES morning rally on May 19, So, the early exit of longs was the best decision I could have made in the circumstances.

Humans are afflicted with Hindsight Bias. Once an event has occurred, we find reasons why we ought to have known what the future was to bring. This bias stops us from learning. There are some things we cannot anticipate no matter how extensive our market knowledge; there are some events that can be anticipated. To contine learning we need to distiguish between the two types of events.

The lack of volume as the ES rose was a warning signal of a possible top and, for me, the small range day on Friday May 16 was the ‘execution signal’. Nowhere in my body of experience would warn me that Monday would be a ‘V Top’.

So, by distinguishing between the two events. I can focus on the ones that may bring new understanding and insights about market behaviour.

Figure 1 shows May 19 intra-day price action.

05-21-2008-30-min-es.jpg

FIGURE 1 May 19

8 thoughts on “Acceptance of Decisions’ Consequences”

  1. Hi Ray,

    All the very best with the operation and hope you make a speedy recovery. Your daily pearls of wisdom will most definitely be missed. Best wishes, Ryan

  2. Hi Ray,

    I’ve been a regular reader to your blog since recently. It is very informative and educational place for traders.

    All the best with the operation and fast recovery.

    Reading about Douglas fear classification it reminds me of the 4 primary trading mistakes that I keep a closer look of. I subdivide them in two categories as follows:
    I. Tactical mistakes:
    1. Missing out(opportunities) signals;
    2. Overtrading (taking low probability signals);

    and

    II. Mechanical (Trade management) mistakes:
    1. Not running winning trades.
    2. Not cutting losing trades.

    All of those mistakes correspond with one of the Douglas fears.

    Again, good luck and waiting for you to get back soon.

    kras

  3. Hi Ray,

    All the best for your operation. Wish you a speedy recovery. And see a good physio before and after your operation

    Best regards,
    Peter

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